Cango Inc. Q2 FY2023 Earnings Call

Good morning, and good evening, everyone. Welcome to Cango, Inc.'s Second Quarter 2023 Earnings Conference Call. This call is also being broadcast live on the company's IR website. Joining us today are Mr. Jiayuan Lin, Chief Executive Officer; and Mr. Yongyi Zhang, Chief Financial Officer of the company. Following management's prepared remarks, we will conduct a question-and-answer session. Before we begin, I would like to refer you to the safe harbor statement in the company's earnings release, which also applies to the conference call today as management will make forward-looking statements. With that said, I would now like to turn the call over to Mr. Jiayuan Lin, CEO of Cango. Please proceed, sir.

Ladies and gentlemen, we are pleased to begin the earnings call today. I would like to remind everyone that forward-looking statements will be made, and I encourage you to review our safe harbor statement in the earnings release. Now, I will hand the call over to Mr. Jiayuan Lin, CEO of Cango. Please proceed.

Hi, everyone, and welcome to Cango's Second Quarter 2023 Earnings Call. Despite ongoing stimulus policies from both central and local authorities, used car consumption and consumer confidence stayed low in the first half of 2023. Moreover, the intense price war in China's auto market disrupted the pricing structure of the automotive industry, creating a widespread sense of caution.

Hi, everyone, and welcome to Cango's Second Quarter 2023 Earnings Call. Despite ongoing stimulus policies from both central and local authorities, used car consumption and consumer confidence stayed low in the first half of 2023. Moreover, the intense price war in China's auto market disrupted the pricing structure of the automotive industry, creating a widespread sense of caution.

In response to the market trends, our focus throughout Q2 of 2023 has been to enhance our service capabilities across our platform. This was achieved by gaining a deep understanding of dealer demand and continuously refining our resource allocation along the automotive value chain. Consequently, we were able to make further strides in diversifying revenue streams anchored in automotive transactions, capitalizing on the potential of our business model. In Q2, the company reported total revenues of CNY 680 million, representing a robust year-on-year increase of 134%. Of these revenues, car trading transactions accounted for CNY 560 million, making a significant year-on-year growth of 157% and a contribution of 83% to our overall revenue. Moreover, by the end of June 2023, the total outstanding balance of financing transactions we facilitated decreased from CNY 20.7 billion as of March 31, 2023, to CNY 16.6 billion, thereby further mitigating our risk exposure. The M1+ and M3+ overdue ratios also saw a decrease from 2.33% and 1.29% as of March 31, 2023, to 2.12% and 1.09%, respectively.

Transactions accounted for CNY 560 million, representing a significant year-on-year growth of 157% and contributing 83% to our overall revenue. Additionally, by the end of June 2023, the total outstanding balance of financing transactions we facilitated decreased from CNY 20.7 billion as of March 31, 2023, to CNY 16.6 billion, thereby further reducing our risk exposure. The M1+ and M3+ overdue ratios also declined from 2.33% and 1.29% as of March 31, 2023, to 2.12% and 1.09%, respectively.

Now I'd like to share more details on the major progress we've made with our different business lines.

Now I'd like to share more details on the major progress we've made with our different business lines.

Firstly, in new car trading transactions, we witnessed a total of 5,893 cars sold through Cango Haoche within the second quarter, reflecting a year-on-year growth of 157.2% and a quarter-over-quarter increase of 52.3%. In the first half of 2023, Cango Haoche recorded a total of 9,760 car sales, indicating a modest year-on-year growth of 7%. As of June 2023, the total number of dealers engaged on Cango Haoche rose to 11,066, a year-on-year growth of 34.3%. Furthermore, the Cango Haoche app saw over 1 million page views by the end of Q2, attracting more than 96,000 unique visitors.

Cango Haoche experienced a significant growth in the second quarter, with a year-on-year increase of 157.2% and a quarter-over-quarter rise of 52.3%. In the first half of 2023, the platform recorded a total of 9,760 car sales, reflecting a modest year-on-year growth of 7%. By June 2023, the number of dealers participating on Cango Haoche increased to 11,066, demonstrating a year-on-year growth of 34.3%. Additionally, the Cango Haoche app achieved over 1 million page views by the end of the second quarter, attracting more than 96,000 unique visitors.

We improved our transaction supporting services in the second quarter to provide a one-stop service experience for dealers and help them grow their business and profitability. For example, we launched auto and non-auto insurance products to help dealers cross-sell and increase customer loyalty while creating new profit streams.

We improved our transaction supporting services in the second quarter to provide a one-stop service experience for dealers and help them grow their business and profitability. For example, we launched auto and non-auto insurance products to help dealers cross-sell and increase customer loyalty while creating new profit streams.

We also added a car loan product to the Cango Haoche app, allowing car buyers to pay in full or installments. Dealers only need to input car buyer information, pay the down payment and the deposit, and can enjoy a seamless one-stop service from ordering to loan applications and administration. These solutions help dealers reduce inventory-related cash flow processes due to asset turnover ratio and lower operating costs.

We also added a car loan product to the Cango Haoche app, allowing car buyers to pay in full or installments. Dealers only need to input car buyer information, pay the down payment and the deposit, and can enjoy a seamless one-stop service from ordering to loan applications and administration. These solutions help dealers reduce inventory-related cash flow processes due to asset turnover ratio and lower operating costs.

Cango Haoche aims to support small and medium-sized dealers by addressing their various business challenges such as vehicle inventory, auto financing, warehousing, and logistics. To this end, we started a pilot cross-region delivery program for new car services in some parts of China in the second quarter, and it was very successful. As we move forward, we will understand dealers' diverse needs better and use our digital infrastructure to support their full sales cycle with digital services from manufacturing to sales, improving efficiency at every step. Through these initiatives, we will boost dealers' efficiency and loyalty and help the auto industry grow in the long term.

We started a pilot cross-region delivery program for new car services in some parts of China in the second quarter, and it was very successful. As we move forward, we will understand dealers' diverse needs better and use our digital infrastructure to support their full sales cycle with digital services from manufacturing to sales, improving efficiency at every step. Through these initiatives, we will boost dealers' efficiency and loyalty and help the auto industry grow in the long term.

Regarding our outlook for the new car market, new car sales increased in May and June, but decreased by 6.3% month-on-month and 2.3% year-on-year in July, according to CTCA data, with more sales promotions by vehicle manufacturers and possible shop price swings, especially in the weak consumption environment. Our focus in the next stage of the new car trading business will be on avoiding potential vehicle inventory risk, and we will control our transaction scales more carefully.

Our outlook for the new car market indicates that while new car sales rose in May and June, they fell by 6.3% month-on-month and 2.3% year-on-year in July, as reported by CTCA. This decline is attributed to increased sales promotions by manufacturers and potential fluctuations in shop prices, particularly in a challenging consumption environment. Moving forward, we will prioritize mitigating any possible vehicle inventory risks, and will manage our transaction scales with greater caution.

Next, on used car trading, we improved the functions of Cango U-Car in the second quarter using our advanced big data and digital technologies. The Cango U-Car app provides secure, reliable, and efficient services to used car dealers and individuals nationwide, such as historic vehicle condition reports, vehicle evaluations, online auctions, online car searches, used car listings, and self-operated or proprietary used car purchases. By the end of the second quarter of 2023, we had 6,900 registered used car dealers on the Cango U-Car app, a mini program with over 611,000 page views and over 31,000 unique visitors. In the second quarter, we sold 651 used cars on Cango U-Car.

We provide reliable and efficient services to used car dealers and individuals across the country, including historic vehicle condition reports, vehicle evaluations, online auctions, online car searches, used car listings, and self-operated or proprietary used car purchases. By the end of the second quarter of 2023, we had 6,900 registered used car dealers on the Cango U-Car app, which received over 611,000 page views and more than 31,000 unique visitors. In the second quarter, we sold 651 used cars on Cango U-Car.

Our proprietary vehicle inventory is the core of Cango U-Car's full service capabilities and our main advantage. It comes from the auto financing business we have developed over the last decade, which includes trading and repossessed cars from over 2 million auto financing customers as well as other high-quality used car sources. We will keep exploring more potential vehicle inventory resources in the future by increasing the channels to acquire used cars from individuals, raising transaction conversion rates, and strengthening repossessed car conversion channels, we will make Cango U-Car more distinctive and competitive in vehicle inventory.

We have developed a strong business over the last decade, which includes trading and repossessing cars from over 2 million auto financing customers as well as other high-quality used car sources. We will continue to explore additional potential vehicle inventory resources in the future by expanding the channels to acquire used cars from individuals, improving transaction conversion rates, and enhancing repossessed car conversion channels, making Cango U-Car more distinctive and competitive in vehicle inventory.

We upgraded Cango U-Car's online functions in June after getting the online auction license in April. All registered used car dealers are now able to list their used cars for B2B options. This gives used car dealers and other tech-powered sales channels, helping them sell faster and better.

We upgraded Cango U-Car's online functions in June after getting the online auction license in April. All registered used car dealers are now able to list their used cars for B2B options. This gives used car dealers and other tech-powered sales channels, helping them sell faster and better.

We also set up an in-house inspection team in the second quarter to provide more professional services as we cover more of the used car trading transaction service chain. Our trained technicians offer professional services such as vehicle condition checks, price evaluations, and documentation verification, while our on-site service team of over 100 experts is now offering basic vehicle inspection and other related services, working closely with vehicle inspection professionals to improve our overall service efficiency.

In the second quarter, we enhanced our inspection team to deliver more professional services as we expand our used car trading transaction service chain. Our trained technicians conduct vehicle condition checks, price evaluations, and documentation verification. Additionally, our on-site service team of over 100 experts is now providing basic vehicle inspections and other related services, collaborating closely with vehicle inspection professionals to boost our overall service efficiency.

Digital capabilities are essential to improve service capacity across the platform. As we drive changes in our platform business ecosystem, we have also been working on worldwide digital transformation. By using a data-centric approach to improve operating efficiency and optimize business processes, we have made our core resources smarter with digital operations, lowering costs and increasing efficiency. We also plan to use data exchanges to share our industry expertise and the know-how we have gained over the last decade with more stakeholders in powering more segments and industries.

We have been focusing on worldwide digital transformation in response to changes in our platform business ecosystem. By adopting a data-centric approach to enhance operational efficiency and streamline business processes, we have improved our core resources through digital operations, which has reduced costs and boosted efficiency. Additionally, we intend to utilize data exchanges to share our industry expertise and the knowledge we have accumulated over the past ten years with more stakeholders, enhancing various segments and industries.

We listed our first data product on Shanghai data exchange in May with our 'Car Dealer Operational Index Query.' It covers the operational data of more than 80,000 foreign exchange dealer and non-foreign exchange dealers nationwide and ranks dealers from multiple dimensions, such as enterprise information, operating information, and risk information. It provides reference indicators for the overall operations of dealers. It is the first data index that includes comprehensive operational information on car dealers in lower-tier markets in the country, and it can be a tool for assessing the financial position and ongoing concerns of core dealers in these markets. We will keep innovating in technology to ensure the industry grows healthily and steadily.

We will keep innovating in technology to ensure the industry grows healthily and steadily.

And I will turn the call over to our Chief Financial Officer, Yongyi Zhang, for a review of the company's financial performance.

Thanks, Jiayuan. Hello, everyone, and welcome to our second quarter 2023 earnings call. Before I start to review our financials, please note that unless otherwise stated, all numbers are in RMB terms and all percentage comparisons are on a year-over-year basis. Our total revenue for the second quarter grew by 133.6% to RMB 675.4 million, of which car trading transaction business revenues were CNY 562.8 million or 83.3% of total revenues. Now let's move on to our costs and expenses during the quarter. Total operating costs and expenses in the second quarter of 2023 were CNY 684.4 million compared to CNY 643.3 million in the same period of 2022. Cost of revenue in the second quarter of 2023 was CNY 615.8 million compared with CNY 272.7 million in the same period of 2022. As a percentage of total revenues, cost of revenue in the second quarter was 91.2% compared with 94.3% in the same period of 2022. Sales and marketing expenses in the second quarter 2023 decreased to CNY 4.2 million from CNY 41.8 million in the same period of 2022. As a percentage of total revenues, sales and marketing expenses in the second quarter 2023 were 1.8% compared with 14.5% in the same period of 2022. General and administrative expenses in the second quarter 2023 decreased to CNY 36.8 million from CNY 124.7 million in the same period of 2022. As a percentage of total revenues, general and administrative expenses in the second quarter 2023 were 5.5% compared with 43.1% in the same period of 2022. Research and development expenses in the second quarter 2023 decreased to CNY 7.7 million from CNY 12.9 million in the same period 2022. As a percentage of total revenues, research and development expenses in the second quarter 2023 were 1.1% compared with 4.4% in the same period of 2022. Net loss on contingent risk assurance liabilities in the second quarter 2023 was CNY 1.6 million. Provision for credit losses in the second quarter of 2023 was CNY 10.2 million. We recorded a loss from operations of CNY 8.9 million in the second quarter of 2023 compared with CNY 354.1 million in the same period of 2022. Net income in the second quarter of 2023 was CNY 36.2 million. Non-GAAP adjusted net income in the second quarter of 2023 was CNY 48.2 million. On a per-share basis, basic and diluted net income per ADS in the second quarter of 2023 were CNY 0.27 and CNY 0.26 respectively, and non-GAAP adjusted net basic and diluted net income per ADS in the same period was CNY 0.36 and CNY 0.35, respectively. Moving on to our balance sheet. As of June 30, 2023, we had cash and cash equivalents of CNY 589.4 million compared with CNY 696.6 million as of March 31, 2023. As of June 30, 2023, the company had short-term investments of CNY 2.1 billion compared with CNY 2 billion as of March 31, 2023. Looking ahead to the third quarter of 2023, we are now predicting our total revenues to be between CNY 300 million and CNY 350 million. Please note that this forecast reflects our current and preliminary view on market and operational conditions, which are subject to change. This concludes our prepared remarks. Operator, we are now ready to take questions.

And our first question today will come from Helen.

As stimulus-led policies have been gradually released since August, could management provide their insights on the auto market in the second half of the year?

As stimulus-led policies have been gradually released since August, could management comment on the auto market in the second half of the year?

First of all, thank you for your question. As the stimulus policies are being implemented, we do see an effect on car sales and also on the car market as a whole. However, if you look at the July numbers, the retail sales volume of passenger vehicles in July was about 1.77 million, decreasing by 6.3% quarter-over-quarter and down 2.3% year-on-year according to data from the China Passenger Car Association. This indicates that the higher than expected delivery figures were actually mainly due to order backlogs in the previous periods. Also, the base for comparison, i.e., the numbers of the same period last year, was relatively high. So the auto market's overall sales volume may decline in the second half of the year.

The volume of passenger vehicles in July was about 1.77 million, decreasing by 6.3% quarter-over-quarter and down 2.3% year-on-year according to data from the China Passenger Car Association. This indicates that the higher than expected delivery figures were actually mainly due to order backlogs in the previous periods. Additionally, the base for comparison, which refers to the numbers from the same period last year, was relatively high. Therefore, the overall sales volume in the auto market may decline in the second half of the year.

Okay. Now a follow-on question. Let me try to translate it. Since Chinese automakers have begun entering the overseas market this year, can management share if the company has any plans to explore the global market as well?

Chinese automakers have begun to enter the overseas market this year. Could management provide more details on whether the company intends to explore the global market as well?

Regarding this question, actually, we are cautiously optimistic about the plan of going overseas and the business units are starting the feasibility. As we are not an auto manufacturer and do not control the production process, the car export business model and potential profitability still needs to be explored. Thank you.

Our next question will come from Sophia Xu with Goldman Sachs.

We are cautiously optimistic about our plan to expand overseas, and the business units are currently assessing its feasibility. Since we are not an auto manufacturer and do not oversee the production process, we still need to explore the car export business model and its potential profitability. Thank you.

I have two questions. The first question is on the macro environment. As we understand that on August 9, the U.S. President Joe Biden signed the executive order that will prohibit some new U.S. investments in China in sensitive technologies. So as a company listed on the New York Stock Exchange, will Cango be affected by this order? And how will the company cope with it? That's the first question. And the second question is related to your company's business. So could you share with us more information on the gross margin of both the new car and used car business?

As we know, on August 9, U.S. President Joe Biden signed an executive order that will restrict certain new U.S. investments in China in sensitive technologies. As a company listed on the New York Stock Exchange, how will Cango respond to this order? Additionally, could you provide more details about the gross margin for both the new car and used car businesses?

Okay. So on your first question about the executive order, we have seen the order and the coverage as China's leading automotive transaction service platform. Our services are not directly impacted by that order in this sector. Moreover, the order exempts publicly traded securities and some other investments, and we will definitely follow the situation closely.

We have seen the order and the coverage as China's leading automotive transaction service platform. Our services are not directly impacted by that order in this sector. Moreover, the order exempts publicly traded securities and some other investments, and we will definitely follow the situation closely.

On your second question, the gross margin of new car transactions is generally about 1%. It really depends on the car model, with some models reaching 2%. Our business model involves centralized purchasing cars from OEMs and then selling them to small- and medium-sized dealers. As we do not control the production process, our gross margin on new car transactions is relatively low. Since our peers maintain a similar gross margin level, we believe these gross margins will remain stable for a while.

In response to your second question, the gross margin on new car transactions typically averages around 1%. It varies by car model, with some models achieving up to 2%. Our business model focuses on centrally purchasing vehicles from original equipment manufacturers and then selling them to smaller dealers. Because we don't manage the production process, our gross margin from new car transactions is fairly low. Given that our competitors have a comparable gross margin, we expect these margins to stay consistent for the foreseeable future.

And on used cars, the price of used cars really depends on the condition of the cars. The gross profit for each car can vary from RMB 1,000 to RMB 2,000. That's all from me. Thank you.

Thank you. That concludes our question-and-answer session. I would now like to turn the conference back over to Mr. Jiayuan Lin for any closing remarks.

Thank you. That concludes our question-and-answer session. I would now like to turn the conference back over to Mr. Jiayuan Lin for any closing remarks.

Thank you all for your interest in and support for Cango. And that concludes today's earnings call. Thank you.

Thank you very much. The conference has now concluded. Thank you, everybody, for joining today's presentation. You may now disconnect your lines.